Crisis in Argentina

January 30, 2014 - 3:07:24 am
Argentina is again facing a financial crisis which has sent shock waves across the country and rattled emerging markets. It’s surprising that this Latin American nation has to be again standing on the brink more than a decade after it defaulted on foreign debts. Memories of those days will send a chill down the spines of all Argentines, and that’s exactly the reason why the current crisis has created a mad rush for dollars.

On January 22, the Argentina peso, already one of the weakest currencies in the world, went from six to one to the dollar to over seven to one the next day. It’s now hovering around eight to the dollar as foreign reserves dwindle. The Argentina’s Central Bank has less foreign reserves today than it had six years ago. If the Central Bank needs to tap into those reserves to save its ever-weakening currency, then Buenos Aires could be faced without enough cash to service its debts or import oil.  

The government of President Cristina Fernandez de Kirchner has panicked and devalued the currency and relaxed some capital controls in an effort to preserve the country’s dwindling forex reserves. But it evident from the market reaction that the government has to do more to address inflation and other serious problems with the economy that have made foreign investors and ordinary citizens lose their faith in the currency. Inflation is at record level. According to independent economists, consumer prices jumped 28 percent last year.

President Cristina must take responsibility for the current crisis and take measures to repair the damage caused by her decisions to the economy. In the years after its disastrous default in 2002, which wiped out the savings of millions of people, the country was doing well economically. Some decisions taken by the president are said to have cause the crisis, like the increased spending on subsidies, the printing of pesos, the problems with the private sector and investors and the nationalization of an oil company and pension funds. The government might disagree on these and might provide its own reasons for the crisis, but it would agree that tough decisions are needed to put the economy back on track. The government must tread cautiously and take into confidence the local economists and the business community so that the problems don’t go out of control.

A crisis in this Latin American nation will push the whole region and the emerging markets into a downward spiral at a time when the global economy has just begun to breathe normally. The Cristina government must keep populism aside and take serious measure to instill confidence. The government has already taken some remedial measures, but they will not be enough.